Hond Financial

Posts Tagged ‘asset ownership’

For some businesses experiencing difficulty, they find themselves with all their capital tied up in large and costly assets. Whilst their competitors may be envious of their asset ownership, since they themselves are required to pay to use the asset in question, these struggling businesses are usually unable to continue trading without a large influx of funding.

When this position is reached, it may be found that to liquidate assets is unacceptable considering a poor secondary market, and also the fact that the practical utility of the assets remain high. In this situation, the resale price of the asset fails to reflect its true value, and so cash from other sources are sought after.

In these circumstances, the asset can clearly be seen to be well integrated into the business and therefore is suited to the running of the company.

Further, the business needs to prioritize the use of the asset over its ownership, and seek to make good use of the equity it holds in these assets. In this sense, for a lender to accept and place an asset as collateral for an injection of funds in the form of a loan, they would be required to structure any finance agreement around an assets profitability; it would simply not make good business sense to lend funds to an ailing business that is unable to be fully secured. It is crucial to ensure that there is sufficient cover in place in order to protect both the company and its employees; many companies are becoming increasingly aware of the benefits of business life insurance for shareholders, key people or employees.

In order to avoid these issues, cooperative providers of facilities to sell and lease back purchase the asset at a reasonable market value, therefore providing the business with the urgently required funds. The structure of the transaction will take into consideration the depreciation of the specific asset, however it will provide the sought after conditional security of funds required by the lender.

From that point a lease is executed where the business leases the asset back on terms congruent with its cash flow projections.

This arrangement can be seen to benefit both the lender and the borrower as both business needs are met: the borrower is able to continue using familiar and trusted assets in production whilst the lender obtains a profitable financial transaction that is secured in order to meet their own policies.

For the once-faltering business, they have a new lease of life, and the ability to ply their trade.

The accountants will simply view their balance sheet as depicting a transfer of assets from a fixed asset account to cash in the bank account. Being on the same side of the balance sheet, if the assets have been correctly depreciated, the transaction ought to leave the balance sheet unaffected. As a lease is now in place, the financial obligations running with such an agreement remain outside the balance sheet, but for the lease repayments being recorded as expenses or costs of sale. For any further information on life insurance or alternative methods of protecting your business, please click here.

Several asset financing alternatives offer a repayment scheme that is better enjoyed by the borrower since they are more able to forecast cash flows and are able to budget for the asset acquisition.

However, as most of these products are tailored to the life of the asset, there is usually an obligation on the part of the borrower to make repayments for an extended period. It often occurs that the borrower is required to assume ownership of an asset, which by the termination of the finance contract is normally expected to have significantly depreciated. Even so, should a refund from the sale proceeds of the asset arise, this remaining amount may be negligible when considering the asset’s secondary market value. In business it is always sensible to ensure that your own financial health is in order and suitable personalized cover such as life insurance or critical illness cover is in place.

A fruitful alternative is that of an operating lease. It is worth noting that particularly useful for the acquisition of assets with either high depreciation or those that harbour a uniquely high risk in ownership, this type of financing allows the lease of an asset over a short period of time, rather than for the life of the asset. This is often the case in terms of acquiring technological assets, as there is always a strong chance that they will require upgrading within the foreseeable future.

Should the borrower have a specific ownership obligation at the conclusion of the finance agreement, and therefore an exposure to the asset’s value at that particular time, in the case of assets that become obsolete quickly, there is a considerable loss that is realized by the business.

By choosing an operating lease, the upgrading of the asset in question is convenient with the term of the lease not being burdensome. The risk of ownership remains with the lessor but this risk will most certainly be reflected in the cost of financing the procedure.

Further components and amendments to the lease are easily added due to the practice being simply to pay a monetary sum for an asset’s use while choosing to negate ownership.

Should it be appropriate at the concluding of the term of lease, the borrower still holds the capacity to negotiate the purchase of the asset. However, an alternative is that the lease may be extended with particular consideration paid to the depreciated value of the assets and, consequently, this will usually be at a lower rate than experienced previously.

Should the asset be used in order to generate income then all lease repayments are eligible for tax deductions within the UK, under the condition that the asset is solely dedicated to business purposes. Since leases and rentals do not appear on a balance sheet, a liability is avoided despite a financier holding the ability to enforce a financial obligation.